MARKET WATCH: Positive economic indicators boost oil prices

HOUSTON, June 15 -- Oil prices rebounded June 14, ending a two-session downturn as the front-month crude futures contract increased 2% in the New York market on positive economic indicators.

“The [US] retail sales number and positive industrial production data from China pointed to improved prospects for oil demand. Dollar weakness provided further support to oil prices,” said analysts in the Houston office of Raymond James & Associates Inc. “Better-than-expected retail sales lifted the broader market yesterday, as worries over the state of the economy temporarily subsided. The broader market rose more than 1% to post its third winning session this month.”

However, natural gas fell more than 1% on forecasts for milder weather. Both crude and gas prices were lower in early trading June 15 in New York.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported crude prices regained most of the loss from the June 13 session. Reformulated blend stock for oxygenate blending (RBOB) gasoline traded higher, following crude. However, Zhang said, “Middle-distillates underperformed, resulting in weaker middle-distillate cracks. The term structure for both West Texas Intermediate and Brent also strengthened on stronger flat prices.”

US retail sales in May were down 0.2%, less than the 0.5% expected decline, primarily because of reduced auto sales. “The financial market took it positively, which pushed many major equity markets higher. Consequently, the oil market received a boost as well. However, we do not see this as a strong bullish signal and believe that it is unlikely to have a lasting impact on prices,” said Zhang.

He said, “The US economy remains the most important underlying factor driving the oil market at the moment, particularly as the Federal Reserve Bank's second quantitative easing (QE2) program comes to an end this month.”

Despite its strong rebound, “WTI is still not printing any momentum,” said Olivier Jakob at Petromatrix, Zug, Switzerland. Instead, it is “keeping its 5-day moving average price at par to the 9-day.” he said, “WTI still needs to break the resistance of $100/bbl and of the 50-day moving average ($100.30/bbl) and even then it will have more work to do before printing a positive momentum.”

Citing a report by Reuter’s news service, Raymond James analysts said, “Almost 6 months after the initial blowout in WTI pricing, refiners and oil market participants are still finding new ways to move crude out of Cushing, Okla. For example, Petro Source LLC will soon begin barging 5,000 b/d from Catoosa, Okla., to St. James, La., at costs on the order of $5-7/bbl. With Cushing inventories sitting just under 39 million bbl, it will take additional logistical solutions (rail, truck, etc.) to relieve the current glut and reduce the WTI discount to a transportation differential. Until these solutions materialize, Midcontinent refiners should continue to benefit from a hefty discount in WTI prices.”

He said, “The first lazy answer to explain the recent surge in the Brent premium to WTI is to blame it on the Cushing glut. However, if we did have a weakening of the WTI spreads earlier in the year—which did explain then some of the Brent premium to WTI—the WTI spreads have been flat since March and in a contango, which is far from extreme. The current premium of Brent to WTI cannot be explained by the WTI side of the equation.”

The “second lazy answer,” he said, “is to blame it on extreme tightness in the European crude oil market. While it is true that the Forties [North Sea field] supply stream has suffered from continued delays, this is not new news, and the time-spreads in Brent have also been very stable since March. Brent is in backwardation but is a mirror image of the WTI contango, and the Brent backwardation is not extreme and has not been significantly widening compared to the levels of recent months.”

The “third lazy answer,” he said, “is to blame it on the Libyan conflict and the disruptions it created to the supply of light, sweet crude oil in the Atlantic Basin. The problem here is that differentials for West African crude oil have been weakening and have now fallen back to the levels they were trading at before the start of the Libyan revolts. All of this makes it very difficult to provide a fundamental explanation for the blow up of the Brent premium to WTI by more than $6/bbl during the period of the Goldman [Sachs Group’s] roll.”

Jakob said, “We are not sure at all if there is a direct causality here, but we just observe that the Brent premium to WTI exploded during the roll of the indices. The rolls ended on June 13, and Brent started to lose some of its premium to WTI on June 14. Is this the beginning of a reversal? Unfortunately we cannot be sure of that because we are not fully clear on the type of flows that were behind the surge these past few days.”

In other news, Raymond James analysts noted protests by striking members of a teacher’s union are disrupting oil production in the Argentine province of Santa Cruz, which provides 20% of the country’s total output. Members of the union have blocked access “to several oil facilities” in the province, and negotiations between government and union officials have broken down. The government offered a 25% salary increase, but the union is holding out for a 50% boost in the 49-day strike.

US inventoriesThe Energy Information Administration said June 15 commercial inventories of US benchmark crudes dropped 3.4 million bbl to 365.6 million bbl in the week ended June 10, exceeding the Wall Street consensus for a 1.8 million bbl loss.

Gasoline stocks increased 600,000 bbl to 215.1 million bbl during the same period, with gains in both finished gasoline and blending components. That was short of the expected build of 1.1 million bbl. Distillate fuel inventories decreased by 100,000 bbl to 140.8 million bbl. Traders’ outlook was for a 1 million bbl increase.

The American Petroleum Institute earlier reported US crude stocks fell 3 million bbl to 363 million bbl in the week ended June 10. It reported gasoline inventories increased 1.1 million bbl to 213.5 million bbl. Distillate fuel stocks fell 426,000 bbl to 143.7 million bbl, said API officials.

EIA said imports of crude into the US increased just 38,000 b/d to 8.6 million b/d last week. In the 4 weeks through June 10, US imports of crude averaged 9 million b/d, 657,000 b/d less than the comparable period a year ago. Total gasoline imports last week averaged 1.1 million b/d, with distillate fuel imports averaging 125,000 b/d.

The input of crude into US refineries dropped 243,000 b/d to 14.9 million b/d last week, with units operating at 86.1% of capacity. Gasoline production increased to 9.5 million b/d, but distillate fuel production decreased to 4.3 million b/d.

Energy pricesThe July contract for benchmark US light, sweet crudes escalated by $2.07 to $99.37/bbl June 14 on the New York Mercantile Exchange. The August contract gained $2.02 to $99.86/bbl. On the US spot market, WTI at Cushing continued to match the front-month futures price, up $2.07 to $99.37/bbl.

Heating oil for July delivery increased 2¢ to $3.13/gal on NYMEX. RBOB for the same month advanced 6.78¢ to $3.06/gal.

The July natural gas contract lost 6.5¢ to $4.58/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 14.1¢, also to a rounded price of $4.58/MMbtu.

In London, the July IPE contract for North Sea Brent crude was up $1.06 to $120.16/bbl. Gas oil for July rose $4.50 to $992/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 26¢ to $113.59/bbl.